Real Estate Exam Prep: Debits vs Credits | Key Topics

Hi this is Joe from PrepAgent, today I want
to talk to you about Debits and Credits. The real estate closing statement is a vital
part of the home buying process. Every licensee should understand the basics,
which is why you will see it on your real estate exam. Let’s begin with some basic definitions. A debit is money you owe, and a credit is
money coming to you. The debit section highlights items that are
part of the total dollar amount owed at closing. This includes the amount due for closing and
title costs, which are generally split between the buyer and the seller- who pays how much
is generally negotiable. The good news for the buyer is that there
are often credits on the closing statement that reduce the amount of the check they need
to write for closing. For example, if a buyer has put down a good
faith deposit to hold the house, they will be credited for this. The seller’s debit section includes the
cost of all the items they are responsible for covering. This includes things like past due taxes,
second mortgages on the home, and repairs or upgrades that need to be made before the
buyer will purchase the home. Charges that show up on a closing statement
as debits for the buyer and credits for the seller will increase the seller’s net profits,
as well as reimburse them for prepaid items and services that will now be the buyer’s
responsibility. On a closing statement, a debit for one side
is usually balanced by a credit on the other side. For example, if a seller is credited for prepaid
taxes they have already paid, there will be a debit for the buyer in the same amount. The closing process may seem complicated,
but it often boils down to signing a series of papers that protect the seller, buyer,
real estate licensees, and financial institution that provides the loan. Here are some other items that can appear
on a typical closing statement. First let’s talk about Loans If a buyer is moving in halfway through the
loan period- mid-month, for instance- the buyer’s mortgage interest and other fees
will be prorated to cover the period of time they’ll be in possession of the house. Unlike rent, which is paid in advance, mortgage
interest is paid in arrears. For example, when you pay a mortgage payment
on January 1, it pays the interest for December. Taxes
Every state bases its property tax calendar year differently. Some states collect property taxes in advance,
some collect in arrears, and some collections depend on the time of year. If taxes are prepaid and you’re the seller,
you’ll receive a credit. If taxes are prepaid and you’re the buyer,
you’ll receive a debit. The opposite is true if taxes are not yet
due and payable-sellers receive a debit proration and buyers receive a credit proration. Insurance Prorations At the time of closing, sellers may find that
they’ll get money back for prepaid insurance. If the seller has paid insurance on your home
through the end of June, for example, and closing is taking place in mid-May, the seller
will get a refund for the amount of time remaining. They get a credit on the closing statement
while the buyer gets a debit. Buyers typically take out a new hazard/fire
insurance policy when buying a home. However, if the buyer is assuming the seller’s
existing loan or buying on a land contract, a buyer might ask the seller to transfer the
existing insurance policy. In that case, the seller would get a credit
and the buyer gets a debit. Homeowner Association Dues Prorations
Since most homeowner associations collect dues upfront, if a seller has not yet paid
the dues, they will be paid from the seller’s proceeds. The seller will receive a credit for the unused
portion of dues, and the buyer receives a debit. Rent Prorations
Rent is generally paid in advance. Buyers who purchase an investment property
can expect to receive a credit for that portion of the rent which covers the time period the
buyer will own the property. For example, a sale that closes on November
15 and involves a tenant-occupied property which rents for $1,000 a month would result
in the buyer receiving credit for 15 days of prepaid rent, or $500, while the seller
receives a debit of $500. Security deposits held by the seller are also
transferred to the buyer as a credit to the buyer and a debit to the seller. Well, I hope that helps you understand debits
and credits a little bit more. This is Joe from PrepAgent and as always,
keep it concise and keep it simple.